THE EXPORT-IMPORT BANK OF KOREA (KEXIM) - 2016

MARC has affirmed the ratings of AAA/AAA_ID on The Export-Import Bank of Korea’s (KEXIM) Conventional and/or Islamic Medium-Term Notes (MTN) programmes with a combined nominal value of RM3.0 billion and AAA on KEXIM’s RM1.0 billion MTN programme. The outlook on the ratings is stable. KEXIM’s ratings are equalised to the Republic of Korea’s (South Korea) AAA/stable rating from MARC on the national scale. The ratings equalisation is based on KEXIM’s developmental status as South Korea’s official export credit agency and is consistent with MARC’s rating approach to government-related entities. The South Korean government’s legal obligation under the KEXIM Act to uphold the bank’s solvency is a key factor in the rating agency’s approach.

KEXIM provides export and import credits, overseas investment credits and guarantee facilities to South Korean companies, and also takes equity investments in them. The bank facilitates financing of long-term and large-scale international projects which are not often undertaken by South Korea’s commercial banks due to associated financial risks. For the first six months of 2015 (1H2015), KEXIM recorded strong loan growth of 22.8% year-on-year (y-o-y), mainly driven by overseas business-related loans as reflected by the foreign currency loan growth of 29.7% y-o-y (on excluding the Korean won depreciation against the US dollar). However, loan growth tapered in 2H2015, bringing the total loan growth for the year in line with 2014’s loan growth of 17.6% y-o-y. MARC understands KEXIM’s planned credit disbursement for 2016 will be lower at KRW75.0 trillion (2015: KRW81.9 trillion) in view of the challenging economic conditions.

MARC notes that KEXIM’s non-performing loans (NPL) stood higher at KRW2.4 trillion with the bank’s NPL ratio at 2.08% as at end-June 2015 (2014: KRW2.2 trillion; 2.02%) as impairments rose in the construction sector and shipbuilding sectors. KEXIM’s loan loss reserve coverage declined marginally to 108.2%. In respect of credit concentration, KEXIM’s five largest borrowers accounted for 18.1% (or KRW23.7 trillion) of its total credit exposures (including loans and guarantees) and 2.4 times (x) its shareholders’ equity as at end-June 2015, (2014: KRW23.2 trillion; 2.4x). For 1H2015, KEXIM registered higher net interest income of KRW286.6 billion (1H2014: KRW176.8 million) on the back of a larger loan base and lower interest expense. However, profit before tax was sharply lower at KRW60.0 billion (1H2014: KRW107.9 billion) mainly due to significant losses on financial assets at fair value and hedging derivatives, as well as higher impairment losses.

As at end-June 2015, KEXIM’s common equity Tier 1, Tier 1 and total capital ratios were lower at 8.9%, 8.9% and 10.1% respectively (2014: 9.3%; 9.3%; 10.5%). To arrest the decline in the capital position, the South Korean government completed a sizable KRW1.1 trillion capital injection in 2H2015 (2014: KRW510 million). MARC draws comfort from the South Korean government’s record of extending capital support to KEXIM’s capital requirement plans. KEXIM’s funding and liquidity positions remain healthy due to its good access to international debt capital markets. The bank’s total borrowings stood at KRW62.1 trillion (2014: 57.3 trillion) as at end-June 2015, an increase of 24.9% y-o-y on the back of strong growth of foreign currency borrowings, which grew by 31.9% y-o-y in 1H2015.

The stable rating outlook reflects MARC’s expectations that there will be no material changes in the bank’s operating and credit profile, and the capacity and willingness of the South Korean government to support the bank in the near to medium term.

Major Rating Factors

Strengths

• Wholly-owned state policy bank;
• Legal commitment from Korean government to provide capital support; and
• Key role in financing South Korea’s export sector.

Challenges/Risks

• Deteriorating asset quality;
• High sectoral concentration in terms of credit exposures; and
• Low profitability as a consequence of its public policy role.